Magazine

Talk Show

November 21, 2004

"Nobody quantified the total cost of the severance package, and I wish we had." -- Graef Crystal, compensation expert who helped craft ex-Disney CEO Michael Ovitz' contract, which gave him a $140 million severance after 14 months' work

Two years ago, accounting firms were doing their darnedest to keep Sarbanes-Oxley from becoming law. Luckily for them, they lost: The measure is turning out to be a boon for bean counters.

Companies are now racing to comply with Section 404 of the Sarbanes-Oxley Act by yearend. The provision requires publicly traded corporations to vouch for internal financial controls and remedy any problems. A recent survey by Financial Executives International, finds that, on average, companies will spend $3.1 million and 30,700 hours to comply -- nearly double estimates in a January poll.

Much of that expense is revenue for privately held accounting firms. Audit fees are expected to jump more than 50% this year, says FEI. To deal with the upsurge, the Big Four are hiring like crazy and logging tons of overtime. KPMG has added 850 auditors this year, while PricewaterhouseCoopers has brought in 400 people from other English-speaking lands as temps. "It's a scramble," says Dennis Nally, PWC's U.S. senior partner. It seems every cloud does have a silver lining.

It's no secret that AOL (TWX) continues to lose subscribers -- from a peak of 26.7 million two years ago to 22.7 million today. And total revenues are leveling, growing just 1% in the third quarter, to $2.1 billion. But the flagging online division of Time Warner is about to rev up new services to boost what it makes from each subscriber. BusinessWeek has learned that on Nov. 15, AOL will announce that it's teaming with an Irish technology company to turbocharge its add-on premium services.

Today, 3.2 million AOL members buy premium services, ranging from $1.95-a-month extra password protection to $8.95-a-month online music subscriptions. Since AOL started offering them two years ago, they number only a half-dozen. But on Nov. 10, AOL broke out premium services as one of four new divisions it's counting on to fuel growth.

Now, with the help of Valista, which provides software that lets wireless carriers NTT DoCoMo (DCM) and Vodafone (VOD) sell ring tones to subscribers, AOL will create new offerings faster than the 12 months it often takes. Expect a slew of new ones starting this year, including Web phone-calling, file backup help, and more digital entertainment.

The Baby Bells' plans to build speedy fiber-optic networks to reach well-heeled homes across the U.S. sidestep rural states such as Iowa and West Virginia. Now these communities are helping themselves across the Digital Divide. On Nov. 11, more than 80 Iowa communities will proceed to set up their own municipal utilities to lay fiber that one day could deliver top speeds of 100 megabits per second, even faster than what some Bells envision for their networks. Meanwhile, five West Virginia communities, and soon towns in other rural states, will vote on similar measures.

A nonprofit group, OpportunityIowa, is spearheading the effort there. Native Iowan Clark McLeod, once CEO of local phone competitor McLeodUSA, founded the $3.5 million nonprofit in January to give underserved regions a shot at a prosperous broadband-fueled economy. "The great equalizer is the Internet," says McLeod. His pal, H. Brian Thompson, chairman of Comsat International, is behind Vienna (Va.)-based nonprofit iTown Communications, which is leading the fiber charge in West Virginia. Thompson is putting his own money into iTown but won't disclose how much.

The duo will face resistance from the Baby Bells and cable operators for their measures, which will need additional funds from municipal bonds. But their networks will be leased to any company that wants to provide services over those lines -- unlike the Bells, which do not have to open their fiber lines to others. "Fiber networks are no longer 'nice to have,' but [are] required to successfully compete," says Thompson. If he and McLeod have their way, everyone -- not just the top half -- will get those byways.

By 2007, if all goes well, Fluffy will be almost perfect. At least that's what Allerca, a Los Angeles startup, hopes as it seeks to breed genetically engineered cats with virtually none of the allergen that makes people sneeze. The hypoallergenic cats, British Shorthairs, will be modified as embryos, using gene-silencing techniques to cut allergens. The fetal kittens are then implanted into female cats who carry them to term. No cloning is involved. Allerca has received "hundreds" of $250 deposits for the $3,500 sneeze-proof felines. Later it may develop hypoallergenic Persians. Cost: a cool five grand each. At those prices, you might still break out in hives.

When Jeff Arnold founded WebMD (HLTH) in 1998, he predicted the Net would revolutionize health care. Not quite. Now Arnold, who left the then-beleaguered company in 2000, is trying to shake up the entertainment business. On Nov. 12, he hopes to popularize the notion of $4.99 disposable DVDs that automatically erase after 48 hours. Flexplay, a startup he owns, is releasing Noel, an indie movie, to theaters as it goes on sale at Amazon.com (AMZN) and two weeks before it's shown on TNT.

Arnold, 34, aims to be a big gun in digital media. He has amassed a hodgepodge of upstart media assets: He owns N2 Broadband, a provider of video-on-demand services, the encyclopedia Web site HowStuffWorks.com, and LidRock, which distributes music or video-game CDs by snapping them into the plastic lids of sodas sold at theaters and fast-food joints. "We're trying to create distribution, we're procuring content, and we're working with advertisers." It's Round 2 for the tech entrepreneur.

On Nov. 4, the Motion Picture Association of America said its members would start suing alleged illegal file sharers. But Hollywood may want to consider whether such legal campaigns have any measurable impact. The Recording Industry Association of America has been suing song swappers since June, 2003, but data on both the suits' effect on file sharing and file sharing's effect on sales are stubbornly inconclusive.

Although music file sharing has gyrated up and down since the suits commenced, BigChampagne, which tracks file-sharing networks for media companies, estimates that the average number of people at any one time on peer-to-peer networks in the U.S. has risen 22% during the past two years. The RIAA points to results from other monitors, such as the Pew Internet & American Life Project and Nielsen//Net-Ratings, that show file sharing is down. But Pew doesn't poll people under 18, a big slice of the file-sharing community. And up-and-coming P2P net-works elude Nielsen ratings.

Similarly vexing are stud-ies on file sharing's impact on music sales. MPAA President Dan Glickman contends that movie downloading -- still tiny compared with music -- will eventually harm DVD sales and box office receipts.

Indeed, Stan Liebowitz, a professor of economics at the University of Texas at Dallas, says there's a correlation between a 4.5% decline in file sharing during the first half of 2004 and a 3.6% increase in the value of music shipments reported by the RIAA, compared to last year. However, a look at the nine months from January to September by BigChampagne shows a 13.2% hike in file sharing, while market researcher Soundscan reports a 5.9% jump in album sales growth. Liebowitz says he hasn't studied the nine-month data. But for now, the MPAA is firmly in the camp of the RIAA.

For 52 years, Hockey Night in Canada has been a Saturday night TV stalwart north of the border. But a National Hockey League lockout has forced the Canadian Broadcasting Corp. to ditch the program in favor of old movies such as A Bug's Life and Legally Blonde. The shocker: The lineup gets almost the same audience -- up to 1.2 million people each night, keeping it among the top-rated Canadian shows.

While the games help pay for other programs at the public broadcaster, the pain is offset by production savings and continued ad sales. "We're satisfied with the revenue we're generating," says CBC rep Ruth-Ellen Soles. "That doesn't mean we don't miss hockey." But it seems many Canadians are coping just fine.